It’s clear that Canada’s current health care spending is unsustainable.
Rising costs are a reality. The COVID-19 pandemic and the recent wave of high inflation are stretching health care budgets. And relief is unlikely thanks to an aging population and an increase in the prevalence of chronic diseases.
A recent report on health spending commissioned by the Canadian Medical Association (CMA), meanwhile, showed that as provinces and territories grapple with more demand, the federal share of health funding is projected to decline.
But who should pay for increased spending on health care, and how? Bold choices will be needed.
What we spend now
Canada spends more than $300 billion annually on health care.
That’s about 13% of our GDP – the second highest among OECD countries.
More than half of health spending goes to three areas: hospitals (25%), drugs (14%) and physicians (13%).
And, yes, equipment is expensive. One MRI machine costs $3 million.
More than 70% of health care spending is publicly funded through general tax revenues.
The provinces and territories generate 78% of the cost, with the federal government providing the rest through the Canada Health Transfer (CHT).
This split has been the subject of debate since Medicare was first established.
At that time, the federal share was about 35%.
In the late 1970s, it dropped to 25%.
Today, the Canada Health Transfer stands at about 22%.
“Short-term, one-time targeted funding cannot repair the foundations of our health care systems; but increased, predictable and recurrent federal funding can make a direct and tangible difference in the lives of Canadians.” — The Council of the Federation, July 12, 2022
How much we need
Health care continues to be a top priority for governments across the country, eating up between 30-40% of provincial and territorial budgets.
Those costs are expected to increase at an average annual rate of 5.2% over the next decade – much faster than projected revenues.
At the Council of the Federation meeting in July 2022, the premiers emphasized the urgent need for a new, sustainable health care funding partnership.
They reiterated their unanimous call for the federal government to increase its share of provincial-territorial health care costs from 22% to 35%.
This would be equivalent to $28 billion per year. And premiers are also demanding increased Canada Health Transfer (CHT) payments without stipulations, arguing they’re best placed to determine how to allocate any new funding.
The federal government has committed to strengthening the health care system across a broad range of areas – pharmacare, dental care, mental health care, long-term care and primary care – which would significantly benefit low-income individuals lacking private insurance coverage, older adults and those living in rural/remote communities.
But Ottawa remains committed to stronger provincial/territorial accountability for any new federal health investments.
Canadians appear to be tired of the bickering and finger-pointing between governments – 38% say that neither the provincial/territorial nor federal governments can be trusted to find solutions to Canada’s health care system. – Nanos poll/The Globe and Mail
There are several ways to pay for increased health care costs:
Changing the CHT formula
The CHT formula could be changed to be more responsive to need. For example, higher costs associated with caring for older populations.
The CHT escalator – which governs how fast federal health funding increases year over year – could also be increased to better reflect the growth rate of health spending. Right now, it’s capped at the rate of GDP growth.
The CMA is strongly urging the federal government to swiftly and collaboratively work with the provinces and territories to achieve a new, long-term and sustained commitment to increasing the share of federal health funding via the CHT.
Finding efficiencies in health care delivery
This could include tackling overuse of health services, implementing further digital health solutions and changing scopes of practice to enable less specialized health workers to deliver some services. On their own though, new models of care, financial incentives and technology are unlikely to fully absorb expected increases in health care costs.
Reallocating public spending
This would require taking money from other areas of government, like defense, housing and education. However, health care budgets have already been increasing faster than other public spending for many years. And shifting additional funding could erode the quality of other essential public services – many of which have an important impact on health outcomes.
Generating additional tax revenue
This could come from dedicated levies and/or payroll taxes to support programs such as national pharmacare or long-term care, or by increasing general tax revenues (e.g., income taxes, sales taxes). The question then becomes which level of government is best situated to generate the additional revenue, and how best to transfer and allocate funding.
Regardless of how more revenue is generated, strengthening accountability for health care spending will be critical to maintaining public support and confidence.
The Canada Pension Plan (CPP), which is managed jointly by the federal, provincial and territorial governments, provides a good model.
Major changes to the federal legislation governing the CPP require the formal consent of the Parliament of Canada and at least seven out of the 10 provinces, representing two-thirds of the population.
Federal, provincial and territorial ministers of finance review the CPP every three years, with expert input from the Office of the Chief Actuary.